Investment Glossary – Budget
Budgeting sounds really boring. It lacks the general excitement of things like fried chicken, live sporting events, and being scared half to death when your significant other jumps out from behind the door when you arrive at home after a long day of work. Heck, budgeting even lacks the excitement of investing in things like stocks, which can take you on a rollercoaster ride of ups and downs in search of good returns. But when it comes to building a budget, boring is good. In fact, boring is great. Because budgeting, at its core, is all about building a plan for your income and expenses so that you don’t run out of money. You want to be bored with your budget – it means you’re doing something right.
In a budget, you look to build estimates of different types of expenses and income so that over a certain period of time, you create a positive cash flow. Look, the principles are pretty simple, so I’m not going to try to make them overly complicated – you want to take in more money than you spend. Building a budget and then analyzing your spending against that budget is a key tool in being able to be fiscally responsible as an individual, family, or business. If you are consistently spending more money than you are taking in, that means you are either eating into savings that you have put away in an emergency fund or other type of account, or you are borrowing the money through some type of loan in order to pay for those expenses. There isn’t anything wrong with these options, provided that they’re built into some kind of plan that makes financial sense in the long term. For example, a whole bunch of people resort to borrowing in order to buy houses to live in. It’s called getting a mortgage, and it’s really, really common. Where budgets get into trouble is when the plan to pay that money back is unrealistic and not feasible, and that’s what building a proper budget can help you with – determining what is a realistic plan for your future.
A budget can go into as much or as little detail as an individual wants it to. Beyond breaking down cash flows into income and expenses, some people choose to go into greater detail, separating purchases into necessities and discretionary purchases. Some people go even further, breaking out specific categories of spending, such as electricity, housing, car payments, restaurants, television, and any other category you can spend money on. There is no requirement in building a budget that creates a need for you to go into this level of detail, but some people find it helpful in terms of being able to identify trends in their spending.
More than anything else, a budget is a process. It is not a document that you simply put together and then never look at again. People who are good at managing budgets look at them on a regular basis, and adjust both their spending and budgets depending on how their cash flow progresses. For example, if you budgeted $150 per month for gas for your car, but then take a new job with a commute that is twice as long, you need to update your budget to account for the extra travel. Likewise, that could create a problem in your budget if you don’t have the income to offset that extra expense, meaning that new job has to either generate extra money for you, or you might have to make cuts somewhere else. A budget is a living document that adapts as your life changes, and the people who use them best make sure to stick with the process, even if it is a little boring. Because a boring budget means you don’t have to get scared about paying the bills every month.